Well known stock market gurus including Warren Buffett, Peter Lynch talk about price, earnings, dividend and growth as the most important measures to identify undervalued securities. According to Jeremy Siegel in the book, "Stocks for the Long Run," “A rule of thumb for stock valuation that is popular on Wall Street is to calculate the sum of the expected growth rate of a stock's earnings plus its dividend yield and divide this by its P-E ratio. The higher the ratio, the better, and the famed money manager Peter Lynch recommends investors select stocks with a ratio of 2 or higher and to avoid stocks with a ratio less than 1.” Instead of using the current PE ratio, we averaged the current PE with the expected PE for the next year (based on analyst’s estimates for 2012). We ran the screeners with the above mentioned criteria to find the undervalued securities in S&P500. Below are the top 5 undervalued stocks in S&P500 according to this criterion.
Valero Energy (NYSE:VLO): Valero Energy Corporation operates as an independent petroleum refining and marketing company. Valero owns and operates 15 refineries and approximately 6,800 retail and branded wholesale outlets in the United States and internationally. The stock is trading with a return on invested capital (ROIC) of 1.42%. The company is expected to earn $3.95 per share next year. The company is trading at a price to earnings to growth (PEG) of 0.17. The company has a sum of growth and yield to PE ratio (GY2PE) of 6.71. VLO is currently trading at $20.82, falling $2.3 or 9.95% this year.
Peabody Energy (BTU): Peabody Energy Corporation and its subsidiaries engage in the exploration, mining and production of coal. Peabody mines and sells thermal coal to electric utilities and metallurgical coal to industrial customers. The stock is trading with a ROIC of 11.13%. The stock is expected to earn $5.21 per share next year. The company is trading at a PEG of 0.27. The stock has a GY2PE of 3.41. BTU is currently trading at $32.99, falling $30.87 or 48.25% this year.
Textron (NYSE:TXT): Textron Inc. is a multi-industry company engaged in aircraft, defense, industrial and finance businesses to provide customers with products and services globally. The company is trading with a ROIC of 1.21%. The stock is expected to earn $1.67 per share next year. The company is trading at a PEG of 0.26. The company has a GY2PE of 3.27. TXT is currently trading at $18.33, falling $5.32 or 22.5% this year.
Wynn Resorts (NASDAQ:WYNN): Wynn Resorts, Limited with its subsidiaries engages in the development, ownership and operation of destination casino resorts. Wynn owns and operates two destination casino resorts Wynn Las Vegas and Wynn Macau and Encore at Wynn Macau. WYNN is trading with a ROIC of 2.64%. WYNN is expected to earn $6.13 per share next year. WYNN is trading at a PEG of 0.33. WYNN has a GY2PE of 2.92. WYNN is currently trading at $106.59, raising $2.76 or 2.66% this year.
Baker Hughes (NYSE:BHI): Baker Hughes Incorporated is engaged in the oilfield services industry. Baker Hughes is a supplier of oilfield services, products, technology and systems to the worldwide oil and natural gas industry. The Company also provides industrial and other products and services to the downstream refining, and process and pipeline industries. The stock is trading with a ROIC of 6.00%. The company is expected to earn $5.55 per share next year. The company is trading at a PEG of 0.34. BHI has a GY2PE of 2.76. BHI is currently trading at $48.08, falling $9.09 or 15.9% this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.